Peugeot Sinks on Fears Cutbacks Not Enough

PSA Peugeot Citroen's shares sank to a 26-year low on Friday amid concerns that a politically fraught plan to axe 8,000 jobs and close one plant may not be enough to keep Europe's second-biggest automaker on the road.

The shares fell as much as 9.2 percent to 6.372 euros as investors digested the disclosure of deeper losses and gloomier prospects than the French company had previously acknowledged. Moody's said it may downgrade Peugeot's credit rating.

Announcing the plan to close its Aulnay plant near Paris in 2014, Peugeot warned on Thursday of a first-half net loss and said its manufacturing division was burning 200 million euros ($245 million) a month. Operating cash flow will stay negative until 2015, it said.

Workers at the doomed factory and another plant facing job cuts in Rennes staged wildcat stoppages on Friday while media headlines reflected public indignation, piling pressure on new President Francois Hollande to act to stop industrial layoffs.

"The bad news is the level of pain that Peugeot are currently suffering to get to this point," Barclays Capital analyst Kristina Church said.

Cutting the bank's target price on the shares to 5 euros from 8.5, Church also cited concern over "the implication that there is no fix in sight until 2014."

Peugeot shares were 7.5 percent lower at 1220 GMT after recovering some of their earlier losses. The stock has fallen by a third this year, compared with a 10 percent gain for the 15-member STOXX Europe 600 autos & parts index.

European car makers are weathering worst auto-market slump in decades, with Peugeot suffering more than most through its exposure to southern markets worst hit by the region's debt crisis and downturn.

The Socialist Hollande, elected in May after he promised to revive industrial production, is "extremely concerned" and has urged ministers to minimize the social fallout, his office said after Thursday's announcement.

His minister for industrial revival said he would explore alternatives with the company and trade unions. But the government has so far stopped short of demanding Peugeot drop the plan, drawing the wrath of the unions.

UPMARKET MOVE QUERIED

The automaker raised 1 billion euros in a March share issue and is targeting a further 1.5 billion from asset sales as it struggles to move its two brands upmarket — a strategy some analysts have questioned.

"The ongoing cash burn means the funds from the capital increase and asset disposals are likely to have been entirely eaten up by the end of the year," Barclays warned.

A day after announcing France's first car plant closure in two decades, Peugeot Chief Executive Philippe Varin called for action to reduce labor costs when the government unveils a broad auto-sector support plan on July 25.

Speaking in interviews with French daily Liberation and RTL radio, Varin sought to ease tensions with unions by signaling flexibility over the cuts.

The company aims to create 1,500 new jobs by converting the Aulnay site for other industries and companies after the plant shuts, Varin said.

"There is room for maneuver in the implementation of these decisions," he said, adding that Peugeot "would like to see a reduction of the charges weighing on labor costs."

But Prime Minister Jean-Marc Ayrault retorted that it was "a bit too easy" for Varin to blame payroll taxes for his company's predicament.

"Labor costs are not the cause of the Peugeot layoffs, contrary to what management has been saying," Ayrault told reporters. The government still had "questions for Peugeot" about the restructuring, he said.